Last updated Sept. 15, 2017.
Just south of the Mason-Dixon line, Kentucky is famous for the venerable Kentucky Derby thoroughbred horse race, which began in 1875. Far more than a horse race, the Kentucky Derby is a see and be-seen social event that is always held at Churchill Downs in Louisville the first Saturday in May. Kentucky is also home to Mammoth Cave, which boasts the world’s largest cave system; over 400 miles of it has been explored.
Those living in Kentucky rather than visiting may not always be so charmed. According to the Bureau of Economic Analysis, per capita personal income (PCPI) in Kentucky was just $39,499 in 2016, ranking the state 43rd-lowest for PCPI and well below the national average of $49,571. In the same year, Kentucky’s GDP was 28th in the U.S., at $197 billion. Its real GDP grew 1.3% from the year prior, compared to a 1.5% national average increase.
Unfortunately, Kentucky ranks eighth in the nation for its bankruptcy rate, which is 345 bankruptcy filings per 100,000 residents as opposed to the national rate of 226 filings per 100,000 residents. Experts agree that wage stagnation, underemployment, and student loan debt are the trends feeding these bankruptcies. Of course, unexpected medical bills are also often a factor.
Chapter 7 Bankruptcy in Kentucky: The Basics
Bankruptcy is primarily governed under federal law, specifically Title 11 of the U.S. Code. Most individuals who file bankruptcy do so under Chapter 7, which is a liquidation bankruptcy, rather than filing under Chapter 13 for a reorganization.
Though bankruptcies are heard in federal bankruptcy court, there are still some state laws that apply, specifically those governing bankruptcy exemptions. A bankruptcy trustee may sell the filer’s non-exempt property to pay debts, but cannot touch property that is legally non-exempt.
The U.S. Bankruptcy Code provides a list of exemptions that are safe from the bankruptcy trustee, but each state can establish their own alternative list of exemptions. In Kentucky, you have a choice regarding which set of exemptions to use.
Kentucky Bankruptcy Exemptions: Can I keep my house?
Once you decide to file bankruptcy in Kentucky, one of your most important decisions will be whether to use the federal exemptions that are part of the U.S. Bankruptcy Code or the Kentucky exemptions primarily found in KRS Chapter 427.
You must be consistent and choose one method of exemptions; you can’t pick and choose. So, in other words, you can’t use the Kentucky exemptions for homestead but the federal exemptions for personal property. Your attorney will interview you in depth about your individual situation before advising which set of exemptions is best for your situation.
Should you decide to use the Kentucky exemptions, you may also use additional exemptions that are called the federal non-bankruptcy exemptions, which may be found in various sections of the U.S. Code. For the most part, these are meant to protect federal benefits for those who decide to use the state exemptions list.
For both the federal and the Kentucky exemptions, married couples who file joint bankruptcies may double the exemption amounts for any property they both own. So if you are married, you can claim your own full exemptions in marital property even if your spouse is also claiming the exemptions.
Let’s take a look at some of the most popular exemptions in Kentucky.
Kentucky vs. Federal ExemptionsThe top 5 exemptions under Kentucky law compared to federal law
|Type of exemption||Kentucky law||Federal law|
|Homestead||$5,000, can be doubled if married and filing jointly||$23,675 of equity in principal place of residence|
|Personal property||$3,000 in household furnishings, jewelry, and clothing; $3,000 in farming equipment; burial plot up to $5,000 in lieu of the homestead exemption||$12,625 aggregate value on household goods, plus federal wildcard exemption applicable ($1,250 plus $11,850 of any unused portion of your homestead exemption)|
|Vehicle||$2,500, including up to one spare tire||$3,775|
|Wages||75% of earned but unpaid weekly disposable earnings or 30 times the state or federal hourly minimum wage, whichever is higher||Income you've earned but not yet received becomes part of your bankruptcy estate|
|Pension/retirement||Exempt||Exempt, with a cap of about $1.28 million on IRAs and Roth IRAs|
You are permitted only a $5,000 exemption on real estate or property used as a personal residence in Kentucky under KRS § 427.060. This is much lower than many states. Under KRS § 427.090, if the property is sold, you will be given $5,000 to “enable” you to “purchase a new residence.” The federal list, on the other hand, allows you to exempt up to $23,675 under 11 U.S.C. 522(d)(1), (5).
Example: If you bought a $200,000 house in which you have over $5,000 in equity, the bankruptcy trustee can sell your house if you use Kentucky exemptions. However, if you use federal exemptions, you can have up to $23,675 in equity and be safe from the bankruptcy trustee. Remember, if you are married and filing jointly, you can both use an exemption on marital property, and this doubles the amount of the overall exemption.
This is an area that your attorney will need to analyze carefully in order to determine whether Kentucky or federal exemptions benefit you the most. Here is a snapshot of bankruptcy exemptions available under each list.
Kentucky exemptions provide:
- Household furnishings, jewelry, personal clothing, and ornaments up to $3,000 under KRS § 427.010(1);
- Tools, equipment, and livestock of a person engaged in farming, not exceeding $3,000 in value under KRS § 427.010(1);
- Professionally prescribed health aids under KRS § 427.010(1);
- Alimony to the extent reasonably necessary for the support of an individual and his dependents under KRS § 427.150;
- Award under a crime victim’s reparation law KRS § 427.150;
- Wrongful death award of an individual of whom the debtor was a dependent under KRS § 427.150;
- Personal bodily injury award up to $7,500 not including pain and suffering or compensation for actual pecuniary loss under KRS § 427.150;
- Loss of future earnings award to the extent reasonably necessary for the support of you and your dependents under KRS § 427.150.
The federal exemptions under 11 U.S.C. § 522 give you exemptions for:
- Household goods up to $600 per item and an aggregate of $12,625;
- Jewelry up to $1,600;
- Tools of your trade including implements and books up to $2,375;
- Health aids;
- $12,625 in loan value, accrued dividends, or interest in a life insurance policy;
- $23,675 for a personal injury award;
- Award for the loss of future earnings you need for support;
- Award for the wrongful death of the person you relied on for support;
- Crime victim award.
One motor vehicle and its necessary accessories, “including one (1) spare tire,” up to $2,500 in value is exempt. The federal exemption is more beneficial at $3,775.
Example: If you bought a car worth $20,000, but you owe the dealership $16,500, you have $$3,500 equity in the car. The bankruptcy trustee could sell it if you use the Kentucky exemptions, but it is protected under the federal exemptions.
Under KRS § 427.010(2), there is an exemption of 75% of earned but unpaid weekly disposable earnings or 30 times the state or federal hourly minimum wage, whichever is higher. A bankruptcy judge may authorize more for low-income debtors.
Under the federal exemption, wages you earn after filing are not part of your bankruptcy estate. Income you’ve earned but not yet received do become part of your bankruptcy estate. Unless wages fall under an exemption, they can be taken by the bankruptcy trustee to pay your debts.
The following pension and retirement benefits are exempt in Kentucky:
- ERISA-qualified retirement accounts under KRS § 427.150
- Police and firefighters’ pensions under KRS §§ 67A.620; 427.125; 427.150(2)(e)
- State and county employees’ pensions under KRS §§ 61.690; 427.150(2)(e); 67A.350
- Teachers’ pensions under KRS §§ 161.700; 427.150(2)(e)
- Other pensions under KRS §§ 427.150(2)(e), (f)
The federal code generally allows you to exempt pensions and retirement money, but have there is a cap of $1,283,025 on IRAs and Roth IRAs.
Kentucky has a wildcard exemption that enables you to exempt $1,000 in anything you like under KRS §427.160. The federal exemption is $1,250 of any property and unused portion of homestead up to $11,850.
Kentucky Bankruptcy Court Locations
The telephone number for the clerk’s office for all divisions in the Eastern District is 859-233-2608.
Ashland: US District Courtroom, Carl Perkins Federal Building, 1405 Greenup Ave., Suite 204, Ashland, KY 41101
Covington: US Bankruptcy Courtroom, 35 W. Fifth St., #306, Covington, KY 41011
Frankfort: Franklin County Courthouse, Grand Jury Room, 222 St. Clair, Frankfort, KY 40601
Note: 341 meetings and initial confirmation hearings for this division are held in Frankfort. Other hearings are held in Lexington.
Lexington: US Bankruptcy Court EDKY, 100 E. Vine St., #200, Lexington, KY 40507
London: US District Courtroom C (3rd Floor), 310 S. Main St., London KY 40741
Note: 341 meetings and initial confirmation hearings for this division are held in Corbin. Other hearings are held in London.
Pikeville: US District Courthouse, 110 Main St., Room 201, Pikeville, KY 41501
Before You File for Bankruptcy
Filing for bankruptcy is a big step. If you are considering it, it would be wise to contact a Kentucky bankruptcy attorney to discuss your options. If you contact an attorney soon enough, it’s possible they can help you avoid bankruptcy.